Have We Entered Another Bitcoin Bubble?

Bitcoin has performed strongly over the past year, especially so far in 2017. Its price has recently hit new all-time highs and surpassed that of gold for the first time ever. Amid this impressive showing, some analysts are concerned that this may be an indication that another crash may be on the way, based on the experience of few years ago. Should you be worried about another bubble being witnessed soon?

Recently, strategist Peter Schiff stated that “today’s bitcoin could be tomorrow’s beanie babies.” That statement was obviously influenced by the sharp rises in the price of the cryptocurrency in the last one year.

Such concerns over a bubble were addressed in a recent article by Vikram Mansharamani on PBS.

The Making Sen$e columnist say it does not yet look like bitcoin is set for a bubble. This was based on an analysis of five lenses, which include the interplay of demand and supply, psychology, politics and epidemic logic.

Only the lenses that have to do with demand and supply and psychology seem to suggest a possible bubble. But the evidence was not overly strong, going by Mansharamani’s analysis.

What economics traditionally teaches is that price reacts to demand and supply. When price is low, demand is high and supply is low. But that is clearly not what obtains in the bitcoin space. While prices have risen significantly from increased interest, the general level of activity, as indicated by volume of trading, has not risen as much. This gives room to the possibility of price tending away from equilibrium. The result from such a situation could either be a boom or a bust.

Somewhat exaggerated views about the potential of bitcoin is a potential threat to its value. Enthusiasts, in the same way as gold backers, believe it is a superb store of value. They sometime describe it as the best investment anyone can make based on potential for value appreciation. Henry Blodget, an internet analyst, even made an audacious suggestion of the value of the cryptocurrency reaching $1 million. Such overconfidence could be counterproductive if there is a reduction in value. Just like other assets, bitcoin price will not rise indefinitely. It tides – prices rise and fall.

On the bright side, Mansharamani noted that there was no evidence suggesting that prices are being pushed up by leverage. People are not being supported to have large holdings with minimal collateral or capital, as done in forex or stock trading. This virtually eliminates the risk of running into debt when the market moves against you.

The decentralized nature of bitcoin makes it better protected against possible bubble. This has made interference by governments less likely to have long-term effects. Prices dipped for a while after China shut major bitcoin exchanges in the country in February. But they have since rebounded strongly, going beyond previous highs.

Civic.com Co-founder and Chief Executive Vinny Lingham had in January echoed similar sentiments as Mansharamani. He told Cointelegragh that he did not expect any bubble to occur. According to him, that may only happen if the price crosses $2,000 by March 2017 or $4,000 by year’s end.

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